Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:
Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.
Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules than bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:
The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.
These depreciation opportunities, however, bring with them a challenge: Determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.
In some situations, future deductions could be more valuable. For example, tax rates for individuals are scheduled to go up in 2013, which means flow-through entities, such as partnerships, limited liability companies and S corporations, might save more by deferring the deductions.
Finally, keep an eye on Congress: It’s possible the current versions of these breaks could be extended or even enhanced.
|
Tuesday, October 30, 2012
Make the most of depreciation-related breaks while you can
Wednesday, October 24, 2012
Why 2012 may be the right year for a Roth IRA conversion
If you have a traditional IRA, you might benefit from converting all or a portion of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.
The downside of a conversion is that the converted amount is taxable in the year of the conversion. But there are a couple of reasons why 2012 may be the right year to make the conversion and take the tax hit:
1. Saving income taxes. Federal income tax rates are scheduled to increase for 2013 and beyond unless Congress extends current rates or passes other rate changes. So if you convert before year end, you’re assured of paying today’s relatively low rates on the conversion. In addition, you’ll avoid the risk of higher future tax rates on all postconversion growth in your new Roth account, because qualified Roth IRA withdrawals are income-tax-free.
2. Saving Medicare taxes. If you convert in 2012, you don’t have to worry about the extra income from a future conversion causing you to be hit with the new 3.8% Medicare tax on investment income, which is scheduled to take effect in 2013 under the health care act. While the income from a 2013 (or later) conversion wouldn’t be subject to the tax, it would raise your modified adjusted gross income (MAGI), which could cause some or all of your investment income in the year of conversion to be hit with the Medicare tax.
Likewise, you won’t have to worry about future qualified Roth IRA distributions increasing your MAGI to the extent that it would trigger or increase Medicare tax on your investment income, because such distributions aren’t included in MAGI. While traditional IRA distributions won’t be subject to the Medicare tax, they will be included in MAGI and thus could trigger or increase the Medicare tax on investment income.
|
Wednesday, October 17, 2012
Social Security disability benefits taxable even though offset by nontaxable worker's compensation
An individual received both Social Security disability benefits and state worker's compensation benefits. For 2009, the Social Security Administration (SSA) reported that taxpayer's total disability benefits were $11,947, which included a $4,715 offset for worker's compensation. Because worker's compensation benefits are generally nontaxable under Code Sec. 104(a)(1), the taxpayer reported only $5,844 in Social Security benefits on her joint 2009 tax return, which was the net amount she received from the Social Security Administration. However, the IRS determined that the full $11,947 should have been reported, of which 85 percent was taxable.
The taxpayer cited Code Sec. 104(a)(1) and claimed that it was unfair to include the worker's compensation amount in her taxable Social Security benefits. The Tax Court found that, not only does Section 86 of the Social Security Act include Social Security benefits in gross income, but that under Section 86(d)(3), if any Social Security benefit is reduced because of a worker's compensation benefit, the "Social Security benefit" includes the amount received under the worker's compensation act. Thus, even though the SSA did not pay the worker's compensation benefits to the taxpayer, they were includable in gross income.
The IRS admitted, however, that although the statute is clear on this point, the result was not obvious. Therefore, the IRS conceded that the taxpayer was not liable for the Code Sec. 6662(a) penalty.
If you have any questions regarding Social Security or worker's compensation benefits, please contact Doeren Mayhew.
IRS issues guidance on PPACA's post-2013 employer's shared responsibility payment
The IRS has issued Notice 2012-58, which provides interim guidance on the Code Sec. 4980H shared responsibility payment for applicable large employers with employees who receive a premium tax credit or applicable payment under the Patient Protection and Affordable Care Act (PPACA). The shared responsibility payment requirement generally applies after 2013. The guidance sets forth some safe harbor methods applicable to seasonal employees and employees who work variable hours that may or may not average 30 hours.
Who is required to make a shared responsibility payment?
Subject to several exceptions, an "applicable large employer" means, with respect to a calendar year, an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.
Under the PPACA, an applicable large employer is subject to a shared responsibility payment (an assessable payment) if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction payment and:
- The employer does not offer toits full-time employees and their dependents the opportunity to enroll inminimum essential coverage under an eligible employer-sponsored plan (CodeSec. 4980H(a)); or
- The employer offers its full-timeemployees and their dependents the opportunity to enroll in minimumessential coverage under an eligible employer-sponsored plan that eitheris unaffordable relative to an employee's household income or does notprovide minimum value (that pays at least 60 percent of benefits) ( CodeSec. 4980H(b)).
What is the look-back measurement period?
Employers may use an extended look-back measurement period of up to 12 months to determine whether their new ongoing employees are "non-full-time" employees that will not subject employers to an assessed payment under Code Sec. 4980H. Examples provided in Notice 2012-58 include variable hours employees, such as waiters, or seasonal employees, such as a ski instructor who works for five months. The IRS explained that an employee is a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.
How long will the IRS rely on this guidance?
At least through the end of 2014, the IRS announced that employers may rely on the guidance outlined in Notice 2012-58 and on the following approaches described in prior Notices:
- Under the safe harbor method forongoing employees, an employer determines each ongoing employee'sfull-time status by looking back at the standard measurement period (adefined time period of not less than three but not more than 12consecutive calendar months, as chosen by the employer).
- If an employee is reasonablyexpected at his or her start date to work full-time, an employer thatsponsors a group health plan that offers coverage to the employee at orbefore the conclusion of the employee's initial three calendar months ofemployment will not be subject to the employer responsibility payment.
- For all employees, an employerwill not be subject to an assessable payment under Code Sec. 4980H(b) foran employee if the coverage offered to that employee was affordable basedon the employee's Form W-2 wages reported in Box 1. Under theaffordability safe harbor, an employee's contribution generally cannot bemore than 9.5 percent of the employee's Form W-2 wages.
If you have any questions concerning how these complex rules for "shared responsibility payments" may relate to your business and what steps might be taken before the rules go into effect, please contact Doeren Mayhew.
IRS refines simplified methods for determining inventory costs, prohibits negative amounts
The IRS has issued proposed regulations that clarify the "simplified methods" for determining inventory costs under the Code Sec. 263A uniform capitalization rules. In a significant change from prior guidance, the proposed regulations would prohibit the use of negative numbers for adjustments to inventory costs, unless particular exceptions apply. Among the exceptions is that the IRS will allow the use of negative amounts by companies using the simplified resale method and by certain small producers.
Code Sec. 263A in a nutshell
Code Sec. 263A requires certain business taxpayers that produce intangible property to capitalize the costs of producing that property. Code Sec. 263A generally requires taxpayers to allocate these costs that must be capitalized to specific items in inventory, which can become complicated for many taxpayers. However, the Code Sec. 263A regulations authorize taxpayers to use alternative simplified methods to allocate costs.
The proposed regulations provide a simplified production method and a simplified resale method for allocating costs to inventory. The simplified methods are an exception to allocating costs to specific items of property. Instead, they allocate a pool of capitalizable costs ("additional Code Sec. 263A costs") between ending inventory and cost of goods sold (COGS) using the "absorption ratio."
Negative amounts
A negative amount (a reduction in capitalizable costs) could occur under different scenarios, for example, if a business capitalizes a Code Sec. 471 cost (such as depreciation) for book purposes in a higher amount than the cost capitalized for tax purposes. A negative amount results if the business removes the excess depreciation by adjusting additional Code Sec. 263A amounts (the numerator of the absorption ratio), rather than the Code Sec. 471 amounts (the denominator). The IRS indicated that these negative amounts could significantly distort the additional Code Sec. 263A costs allocated to ending inventory.
Proposed rules
The proposed regulations would supersede Notice 2007-29 and would generally prohibit the use of negative amounts in applying the simplified production method. However, the proposed regs provide several exceptions. One exception applies to smaller producers with average annual gross receipts of $10 million or less. The proposed regs also allow the use of negative amounts by retailers and wholesalers under the simplified resale method. The regulations also provide an alternative simplified production method that would reduce overcapitalization and distortion, the IRS predicted. While not yet "finalized" and therefore officially operative, taxpayers are advised to start following IRS's revised views now or face time and expense in defending the reasonableness of a contrary position.
IRS sets net operating loss (NOL) limits on corporate equity reduction transactions (CERTS)
The IRS issued long-awaited proposed regulations on the limitations on net operating losses (NOL) for excess interest deductions. The limitations apply when a corporation engages in a corporate equity reduction transaction (CERT) that generates or increases an NOL because of an excess interest deduction. The provision prevents the excess NOL from being carried back over the normal carryback period and generating a refund.
Congress enacted the limitations in 1989, but the IRS had never issued regulations. Congress wanted to limit the ability of taxpayers purchasing corporations to use debt to obtain refunds from carrying back NOLs attributable to interest on the debt. The application of the limitations has resurfaced because taxpayers were carrying back NOLs from 2008 and 2009 with an interest component. The issue is now being seen on returns audited for those years.
Although the regulations are proposed to apply only when published as final regulations, the IRS requested comments on transition issues, such as the application of the regulations to transactions occurring in years before the IRS issues final regulations.
A CERT is either a major stock acquisition (the acquisition of at least 50 percent of the stock in another corporation) or an excess distribution (the distributions made on stock during the year, compared to the average distributions over the three immediately preceding years). A CERT can arise from either a taxable or a tax-free transaction. For example, the law requires the testing of a Code Sec. 355 spinoff, a Code Sec. 351 reorganization, and a Code Sec. 368 stock acquisition. Practitioners have warned that this is a broad provision that will require an additional layer of analysis for many corporate transactions.
The regulations explain when a CERT has occurred, the computation of the excess NOL, and the treatment of successor corporations. The regulations provide that an integrated plan of stock acquisition with multiple steps will be tested as a potential CERT.
The regulations also discuss the treatment of consolidated groups, which must be treated as a single taxpayer. The regulations address: the group's average interest paid or accrued in the three years preceding the CERT; the effect if a corporation participating in a CERT becomes a member of a consolidated group; the effect if a group member deconsolidates after the group participated in a CERT; and apportionment of the excess loss to members of the group for carryback or carryover to separate return years.
Largest ever IRS whistleblower award given to Swiss bank employee
A $104-million IRS whistleblower award has been paid to former Swiss Bank UBS AG employee Brad Birkenfeld. The award is purported to be the largest paid under the IRS whistleblower program. Information provided by Birkenfeld aided the IRS in uncovering tax fraud in offshore accounts, which has resulted in collection of $5 billion so far. The IRS Award Report stated, in part, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions."
In response, an IRS spokesperson emphasized the importance of the IRS whistleblower program. "The IRS believes that the whistleblower statute provides a valuable tool to combat tax noncompliance, and this award reflects our commitment to the law," the spokesperson explained.
If you have questions about the IRS Whistleblower program, please contact Doeren Mayhew.
Wednesday, October 10, 2012
Make the most of depreciation-related breaks while you can
Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:
Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.
Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules than bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:
The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.
These depreciation opportunities, however, bring with them a challenge: Determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.
In some situations, future deductions could be more valuable. For example, tax rates for individuals are scheduled to go up in 2013, which means flow-through entities, such as partnerships, limited liability companies and S corporations, might save more by deferring the deductions.
Finally, keep an eye on Congress: It’s possible the current versions of these breaks could be extended or even enhanced.
|
Wednesday, October 3, 2012
Time is running out for tax-free treatment of home mortgage debt forgiveness
Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Debt forgiveness isn't the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.
Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude from their taxable income up to $2 million in COD income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). But the exclusion is available only for debts forgiven (via foreclosure or restructuring) through 2012.
QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn't available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).
If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home. Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it's generally better to defer tax when possible.
So if you're considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion while it's available.
|
Subscribe to:
Posts (Atom)